Finding the light at the end of the rail tunnel

Anand Medepalli
Vice President of Freight Transportation at JDA Software
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Post date: Saturday, 4th August 2012

The European rail freight market has been de-regulated since 2007, enabling a rail operator to offer their services in any EU country without the hurdle of cross-border delays and the inherent complexity of individual nation regulations. This allows them to offer customers an enhanced logistics management experience by being a one-stop-shop. Such ability naturally fosters competition in the industry, especially as national operators have to give up on their monopoly in their state.

While this is great news for rail freight operators, they still have a long way to go. Statistics from the UK Department for Transport showed that in 2010, road freight covered 81% of all domestic freight traffic in the UK while rail freight covered just 5%; with organisations seemingly failing to see the value in rail freight.[i] But a potential rise in taxation for road freight discussed in the European Parliament last year means it stands to get more costly.[ii] So with the ability to offer lower costs with higher capacity than road freight (especially for heavy or specialised loads) and therefore offering greater efficiency, rail freight has a golden opportunity to gain market share from road transport in particular, competing effectively within the overall freight transportation market.

In order to fulfil this potential, rail freight operators need to move away from thinking of themselves as a purely operational company but as a customer-centric company. Instead of focusing primarily on how to move goods once they arrive, a more commercial way of thinking is needed by first planning for what goods they wish to move and how. While some freight operators have recognised this, many need to begin undergoing this change by implementing transformational strategies:

1. Enable the ‘freeway concept’: In the EU’s deregulation proposals in the late 90s, the ‘freeway concept’ was defined as giving rail operators “fair, equal and non-discriminatory access across all EU railroads.”[iii] To truly enable this concept, rail operators must invest in EU-wide sales and marketing with integrated systems that provide pan-EU quotes, pricing, invoicing and tracking capabilities – much like their counterparts in air cargo do.

2. Strengthen key customer relationships: In air cargo, 80% of revenues are provided by just 10% of the customers. Air cargo carriers invest significantly in these customer relationships by offering logistics expertise and services such as handling and warehousing. Rail freight operators need to begin emulating this winning approach from air cargo; especially since competing on a pan-EU basis will require these operators to have a strong base of key customers looking for more than just transport.

3. Planning for demand: In many organisations this basic necessity is not tracked at all – at least not for commercial reasons. To move to a commercial focus, rail freight operators should be monitoring demand, anticipating the requirements of their key customers and feeding that information into all their planning activities. Understanding market segmentation and customer preference for transportation mode is imperative to gain market share overall.

4. Reliable service offering: Some rail operators wait for enough orders to accumulate before announcing which train service they would offer. This has a significant effect on customer service, where a customer placing an order does not quite know how that order is likely to be fulfilled. However, smart and effective demand planning can provide the needed information up front to allow the rail operator to define a timetable schedule to offer to the marketplace.

5. Managing capacity: A huge issue for all rail operators is allocating rail freight trains efficiently across their network.  This assignment becomes complicated due to the need for minimising empty train movements across the network.  Considering demand forecasts, service levels, storage costs, transportation costs and utilisation metrics, operators should look to optimise capacity to meet the forecasted demand, the planned timetable and service levels promised.

6.  Profit optimisation:  This is easier said than done in this industry of high capital costs and thin margins.  Air cargo is similar in this regard and this industry can benefit from adopting the ‘Revenue Management’ technologies the air cargo carriers have developed to identify profitable pricing strategies by factoring in market trends and competitive behaviour, including being able to provide optimal customised pricing for key customers.

7. Operational excellence: Delivering on service level agreements has to be seen as the bedrock for achieving operational excellence.  Rather than relying on ad hoc or just-in-time information, with proper collaboration based on sound planning practices, the operations’ department can better plan for the activities for any given day. By creating sufficient lead time in planning activities, it should be possible to simulate ‘what-if’ scenarios for likely service level disruptions and have back-up plans ready rather than the current practice of reacting to events with little time to spare for any analysis.

While de-regulation is a great opportunity for rail freight operators to finally compete with other freight transport industries, it also means that they will be competed against.  To capitalise on the new opportunities, the industry needs to begin implementing a more commercial business model than the operational one it uses now.  By doing this, it can highlight to customers the advantages of using rail freight, such as cost efficiency and greater load capacity.  Not only will this change benefit the current low market share rail freight has in the freight industry but it will also give the rail freight industry the reputation and profitability it deserves.




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